MORNING BID – Retail therapy

Aug 13, 2014 13:11 UTC

All that’s left for investors now when it comes to earnings season is the shouting, but if the rest of the retailers post results anything like Kate Spade did on Tuesday, the shouts will be screams of terror rather than anything that assuages investors over the state of the overall economy. Kate Spade’s executives went into some detail on its conference call as to the nature of its margins shortfall – which Belus Capital chief equity strategist and longtime retail analyst Brian Sozzi said are not likely to improve until the middle of 2015 – and the company then did itself no favors by declaring that it wouldn’t be discussing the margin issues any further on the call. (Craig Leavitt, the CEO, violated that rule to some degree, but basically, investors don’t like it when you tell them flat-out that you’re not going to talk about your problems, and when you’re a company with a forward price-to-earnings ratio of 77.5 and a price-to-book value of 119, that’s going to be particularly true.)

Other luxury retailers have noted their own problems with attracting customers at this time, including Michael Kors Holdings, which saw its own shares stumble of late after also warning of margin pressures due to expansion in Europe, but at least Kors has a forward P/E ratio around 19, which puts it in line with peers like Coach and Ralph Lauren.

After Macy’s, which reported this morning – and put some ugly numbers out there

Wal-Mart has trailed the S&P for the last several years.

Wal-Mart has trailed the S&P for the last several years.

- the next big retailers out of the gate are Kohl’s, Nordstrom and Wal-Mart, and of course they’re all over the map when it comes to big retailers; Nordstrom profiles a bit more like Coach and Kate Spade in terms of clientele, but they’re a big department store, so not really comparable at all. Nordstrom’s growth, though, is expected to come from the Nordstrom Rack outlet stores, with same-store sales estimates for the entire company at 3.3 percent, but a 1.2 percent decline expected in the full-line sales, according to Thomson Reuters data.

Either way, investors will be keeping an eye on margins at Nordstrom’s and Tiffany & Co (which reports later in the month). Nordstrom, in its last release, said it expected a 30 to 50-basis point decline in gross profits for fiscal 2014 (which ends early 2015), compared with 10 to 30-basis points prior to its May earnings release, and its earnings before interest and taxes fell to 7.9 percent in the May quarter 2014, from 8.7 percent a year earlier. While some companies this quarter talked of margin pressures as a result of rising prices, with retailers it seems more to be their inability to get away from hefty discounting to bring consumers into the stores.

Wal-Mart is a trickier case. Sozzi, for his part, believes the company could fall short of results if inventory growth continued to grow faster than net sales, and if they relied heavily on clearance zones to move inventory, that will hurt overall margins as well. The company forecast second-quarter profit below analysts’ expectations in May, and so investors are going to see if there’s any sign that its execution is changing now that it has appointed a new CEO and new head of online business. The company has seen margins slipping as well, as its pre-tax, pre-interest and depreciation margins dipped from the high 7s between 2011 and 2013 to 7.5 percent in 2014, and it’s trailing the S&P badly in the last several years.

MORNING BID – Closet cases

Jul 10, 2014 12:57 UTC

Usually when retailers warn of earnings weakness – particularly if they’re saying the entire economy is in a funk – there are two possible explanations:

1: They’re right, and the real economy is truly suffering, or
2: It’s all their own fault.

That the likes of Lumber Liquidators and Container Store Group should warn of comings earnings shortfalls and weak results in the next few quarters – pegging to a consumer that didn’t rebound after the weak weather-hammered first quarter – would seem to fall into the former category, at least at first glance. After all, Container Store, despite stocking its shelves with all sorts of bric-a-brac designed to keep other bric-a-brac, has built its reputation on its Elfa closetizing system that to the normal person is a weird Rube Goldberg contraption but yet stores all 300 of your pairs of shoes, et cetera. And Lumber Liquidators is pretty binary – they sell discounted hardwood flooring. And so with both citing weak conditions that persisted past the weather-related mishegoss that dominated the first quarter of 2014, that’s at least enough to raise some eyebrows.

Both companies deal with the kinds of purchases that speak to substantial renovation and therefore depend specifically on the housing market, which of course weakened in the first half of the year and hasn’t rebounded to levels seen last year. Existing-home sales are still about 5 percent below the level reached a year ago, according to the latest from the National Association of Realtors, even though the May figures did represent an increase from April, suggesting a bit of increased momentum. But if the first-quarter housing weakness then gives way to an ongoing lag in the kind of spending that had people expecting a rebound in the second quarter, well, all the optimism about earnings that’s been baked into stock prices in recent days will surely unravel.

Of course, it’s plenty possible that the companies are screwing things up on their own. Container Store only went public for the first time last year, and after a brief rally that brought shares to a 52-week high of $47 around the end of 2013, it’s been a dog since, losing 43 percent of its value in short order. More than 10 percent of the shares are being shorted right now, and StarMine shows a whole load of worrying metrics with the company – it ranks worse than 90 percent of U.S. names in terms of its price-to-earnings ratio, and also sports a high price-to-book and price-to-cash flow level right now.

Lumber Liquidators doesn’t look much better in this regard. About 13 percent of shares are being borrowed for short bets, and it ranks in the lowest quartile in terms of relative value, given it’s very high price-to-book ratio and price-to-cash flow ratio, which again, just suggests investors are valuing the company’s assets pretty highly given the weak earnings expectations and ongoing reductions in its outlook. The stock is down nearly 32 percent year-to-date, and that doesn’t even include what is likely to be another selloff on Thursday, as it was down about 20 percent in overnight action.

The day’s earnings do not include too many names that can be seen as corollaries for these retailers; Kaufman & Broad, a homebuilder, is about the closest. Interestingly, in late May, Home Depot did reaffirm its earnings outlook for the year and raised its per-share earnings outlook in part due to improved expectations for sales growth. HD has a way of crowding out others – but another such update of that kind might settle just whether there’s a bigger storm coming in retail, or if it’s just warping the hardwood floors.

MORNING BID – The first step is a Lulu

Jun 12, 2014 13:59 UTC

It will be interesting to see if the spiral that yogawear retailer Lululemon Athletica has found itself in over the last year is one that can be arrested. Companies rise and fall often in this world, but the U.S. stock market’s history is littered with retailers that went into a tailspin after series of missteps that turn once-interesting investments into a veritable death trap for investors, and result in the kind of drop that benefits mostly short-sellers, late-night comedians and eventually restructuring lawyers.

It’s particularly rough for companies that inspire cult-like followings, be they as a stock or as a retail purchase, as markets eventually become saturated, competitors jump into the fray, and investors go forth and look for the next big thing to occupy their time. And a stock like Lululemon, which quintupled between late 2010 and early 2012, is kind of the definition of a cult stock. That’s well and good when earnings keep going, which kept the stock price in a range (albeit elevated) through December 2013, but those days are over.

Coming into the morning, investors were betting on a 9 percent move in the stock by the end of the week in one direction or another, and it turns out they may have undershot that expectation in terms of volatility, as the stock is down 14 percent after results that clearly came out disappointing and don’t point to the kind of turnaround that the bulls on the company had hoped for (not that there are a heck of a lot of those right now – as of yesterday about 80 percent of the shares that could have possibly been used for short bets were being borrowed for such a purpose, according to Markit). With the stock cut in half in the last year and more expected, the bearish bets on the company are likely to pick up.

Lululemon’s realized volatility over the last 30 days sits at about 23 percent, with expected 30-day volatility at about 53 percent according to, so investors had been anticipating more action, but even with this decline, StarMine’s intrinsic value on the stock is still lower, at about $29.95 a share, modeling 8 percent annual growth over the next 10 years, compared with growth of about 12 percent or so expected by investors for that period of time.

As investors have seen with the likes of Aeropostale, Abercrombie & Fitch, and even larger department stores like J.C. Penney, once a brand has a certain level of stink on it, it’s not something that easily washes off. Lululemon certainly has a smell to it – and not the yummy Canadian bacon kind – thanks to the Vancouver-based retailer’s founder Chip Wilson saying a year ago that “some women’s bodies just actually don’t work” for Lulu’s pants after it had to recall its yoga pants for being more-or-less see-through. Add to that supply chain issues and it’s not the happiest of pictures: coming into the day, StarMine shows its enterprise value-to-revenue ratio at about 3, compared with competitors like Gap and VF Corp, which sport better ratios on that front. Again, it still points to a lot in terms of expected growth that may be difficult.

“As we move into 2014, we are reflecting on our learnings with humility, and are entirely focused on our future,” Chief Executive Laurent Potdevin said in a statement. Investors are thinking about that future, too.

MORNING BID – Spending concerns and car sales

Jun 4, 2014 12:54 UTC

Coming data on same-store sales will help illuminate whether the modest upward tick in prices is something that is being replicated throughout the economy and signalling a stronger overall economy or perhaps one that remains more weighted to the most wealthy in the United States. According to Thomson Reuters data, Costco is poised to post the strongest same-store sales figures among the retail chains, though its 4.6 percent estimated increase would fall short of the 5 percent rise a year ago. The figures have a bit less utility than in the past given the likes of Wal-Mart stopped supplying this data years ago, but you work with what you have. Either way, it’s notable that the discounters have been weak this year – a sign of lackluster spending outlooks for lower income Americans.

The lower-income sector has seen its share of economic growth diminish over recent years, a trend that has been accelerated in part by the weakness in housing prices in most parts of the economy, poor overall demand and lack of spending among all but the upper tier of consumers, and no real growth in wages — though this morning’s data on productivity and labor costs does show finally some wage growth.

Meanwhile, the weakness in Sotheby’s stock price in 2014 does suggest on some levels that the luxury brands, and the wealthiest Americans who drive the speculative spending excess in the economy, may be waning as quantitative easing finally recedes, as strategists at Bank of America-Merrill Lynch pointed out.

Auto sales were strong in May, boosting hopes for economic growth.

Auto sales were strong in May, boosting hopes for economic growth.

The car sales figures were encouraging in some ways – the seasonally adjusted annual rate of 16.77 million vehicles now sits at a level not seen since 2007, though it’s disconcerting that it has taken this long to return to such a level. But solid figures for compact cars – sales of the Chevy Cruze were up 40 percent from a year ago, and it’s got a starting manufacturer’s price in the mid-17K range – would at least show some confidence among auto buyers looking for economical vehicles. Other big gainers were the Toyota Corolla (there seems to be some kind of dictum that every block has one of those), the Nissan Sentra (avg starting price around 16K) and the Toyota Camry, another perennial favorite among American buyers. Along with the usual big pickups, those were the biggest sellers, and year-to-date the Cruze and Sentra are showing the strongest growth.

Whether it can turn into something more long-lived is unclear at this point. Purchases of big-ticket items are a usual harbinger for steady, ongoing growth, but various hiring indexes – including Morgan Stanley’s Business Conditions Index – show employers still a bit on the fence even as overall conditions improve.

The Morgan Stanley index is a bit undermined by recent data out of the National Federation of Independent Businesses showing seven months in a row of employers increasing hiring, which Jack Ablin of Harris Bank says “could be an early indicator that labor prospects are rebounding.” It remains to be seen – the NFIB’s notoriously cranky surveys still note that the biggest problems facing small businesses are in order A) taxes and B) regulation. Those two factors tend to be the things businesses complain about the most in the early- and mid-cycle of an economic recovery (as the cycle improves, regulation recedes as a concern, and when recession hits, lousy demand takes over).

MORNING BID – There’s A Sale at Penney’s!

May 14, 2014 12:51 UTC

We come not to bury J.C. Penney, because everyone else has done that a few times over already.

Headed into the last gasps of earnings season, overall earnings growth for the quarter is currently 5.5 percent – much better than the 2 percent expected at the outset of reporting season and trending back in the direction of what had been expected Jan. 1 before, well, before anybody knew anything at all.

Any chance the S&P 500 has to see earnings jump above 6 percent growth depends largely on consumer stocks; there’s Lowe’s, Home Depot, Wal-Mart and a few others that, if estimates turn out better than expected, will result in bottom-line growth coming out better than expected. That would be a welcome development even though overall revenue growth seems to be hovering around 3 percent for the S&P 500.

The question is whether those earnings reports would be enough to realize some kind of shift back to the more growth-oriented names, as consumer discretionary shares have been relative underperformers of late, along with other growth brethren like the small-caps. The latter has been a severe point of weakness in the last few months as well, giving rise to concerns that it will pull the market lower with it.

On to J.C. Penney, then, current title holder of the overused phrase “struggling retailer,” having inherited it from Circuit City and Linens ‘N Things.

Options activity hasn’t been as negative as in the past, with Schaeffer’s Investment Research’s open interest indicator showing 1.37 puts to calls, which ranks higher than 58 percent of readings in the past year, but well off the high of 2.49 reached in the summer of last year.

That kind of thing changes rapidly with the likes of JC Penney, though, given that it’s still a company with very high short interest – about 30 percent of the outstanding float, which puts it in the lowest percentile among both retailers and the overall U.S., according to StarMine data.

This of course also puts it at great risk for a short squeeze should it surprise on its numbers in one way or another, which could happen, one supposes; stocks like this are often very volatile because there’s no telling what they’re going to come out with, making a calculation of their real value very difficult.

It’s a $9 stock right now, which assumes a certain level of liquidation value (it has a price-to-forward cash flow estimate of 44.2, which basically just says when it comes to cash flow, they’re a little shaky, as in, they ain’t got any).